Home Living: Avoiding Late Rent From Roommates

Home Living: Avoiding Late Rent From Roommates

Last year I become a first time homeowner — exciting, right? Moreover, I also then started managing my first rental property. You see, while I was in the process of buying a home, I decided I’d split the cost of my mortgage by also seeking out roommates. Fast forward a bit, and I now have found a few people to live with. However, I have also found myself up against a common challenge many managers — and roommates in general — have: late rent!

To solve this dilemma, I turned to a few of my financial mentors, who also own rental properties, and asked them what their solutions were for a.) finding good tenants and b.) getting them to pay rent on time. Most, if not all, said the best way to handle a late payer is by putting in place a penalty for late rent (e.g. $25 for each week late). To me, though, charging a person who was obviously already struggling to pay rent was a little counter-intuitive. Instead, I started thinking about what incentives a tenant might naturally have to pay rent on time, without having to resort to an extra fine. I came up with two:

  • Pay rent on time to avoid conflicts with either their manager or roommates
  • Pay rent on time in order to maintain a good relationship with the manager for a possible lease renewal

The problem is that many of these depend on how "good" a person is and don't actually put a financial incentive in front of the tenant for paying early. So I decided to impose what we will refer to as an LAI (Late Avoidance Incentive).

In the end, I decided that if my roommates paid their rent before the 1st of each month, they would receive $25 off their normal rent. For further peace of mind — important to me — I decided that all utilities (washer, dryer, Internet and cable) would be covered (and included) in their flat rent. Since these two changes in policy have been put in place, there actually has been a small culture change in my house. Not only has incidents of late rent gone way down (read: zero), one of the guys living with me has even tried to pay me several months in advance in order to save hundreds of dollars over the course of a year.

So let’s do a little cost/benefit:

Cost:

  • I receive $25 a month less from tenets
  • I don't receive extra compensation for late rent

Benefit:

  • Rarely do I have to bug tenets to pay rent
  • My mortgage is paid often early on my part
  • Roommates feel that I am looking out for their best interests

A year into home ownership and I have yet to receive a late payment from roommates, not even by a day. Not to say my system is perfect, or that I am even getting the best deal, but the money is steady. I would recommend, however, that if you are going to cover utilities or any bills that aren't fixed, that you make sure you put a cap on the amount you are paying as the homeowner.